Pension taxation
Pension taxation outlines how Canadian tax law applies to pension and similar payments. In this article, the term pensions will include:
- public pensions - Old Age Security (OAS), Canada Pension (CPP), Québec Pension (QPP), US Social Security, etc.
- employer pensions - defined benefit or defined contribution
- payments (withdrawals) from individual retirement savings plans - Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Locked-In Retirement Accounts (LIRAs), US IRAs, etc.
Canadian source pensions paid to Canadian residents
The Income Tax Act assesses taxes on Canadian residents on all income received. Pension payments received from Canadian payers are taxed like most other income at the individual's federal and provincial marginal tax rates. Some public pensions are means tested for income and are phased out as income rises. Tax liability can be reduced slightly through pension credits ($2000 federal;[1] $0-2000 provincial) for some payment types. Married couples may also be able to reduce overall tax liability by opting for pension splitting on some types of pensions.
| Source | Tax Exempt? | Means Tested? | Pension Credit? | Pension Splitting? |
|---|---|---|---|---|
| OAS | > $76,000 | |||
| GIS | YES | > $7,300 | ||
| CPP/QPP | ||||
| Employer pension (age 55 and over) | YES | YES | ||
| RRIF payment (age 65 and over) | YES | YES | ||
| RRSP payment (age 65 and over) | unlikely | unlikely |
RRSP withdrawals and RRIF payments in excess of the minimum withdrawal schedule are subject to withholding taxes of 10-30%. The withholding tax is creditable against tax liability when the year's tax return is filed.
Foreign source pensions paid to Canadian residents
Foreign pensions received by Canadian residents are generally taxed in the same way as domestic pensions,[2] i.e. at full marginal rates. Canadian tax liability may be reduced by a tax treaty with the source country, and Canada usually gives credit dollar for dollar for any tax withheld by the source country on a Canadian resident's tax return. (A tax treaty may also specify or reduce taxes owed on the pension to the source country. See the table in the next section for an indication, as tax treaties often treat similar payments symmetrically, but consult the tax treaty that governs before making any big decisions.)
US source pensions
Many Canadian pensioners spent at least part of their working careers in the United States. Such employment may create eligibility to receive pensions after coming (or coming back) to Canada.
The US withholds tax from pension payments to Canadian residents. The statutory withholding rate is 30% but the US-Canada tax treaty reduces this rate to 15% on periodic payments and to 0% on Social Security.[3] Claiming the 15% rate of withholding requires filing the IRS W-8 BEN form with the payer.[4] Tax withheld by the US is creditable, usually dollar for dollar, against Canadian tax on the pension received.[5] An "early withdrawal" from an IRA to a payee under the age of 59 1/2 will usually result in additional US tax of 10% being withheld and remitted to the IRS.[6]
| Source | Taxable Portion | Pension Credit? | Pension Splitting? |
|---|---|---|---|
| Social Security | 85% | YES | YES |
| Employer pension | 100% | YES | YES |
| IRA distribution | 100% | NO | NO |
Canadian source pensions paid to non-residents
Part XIII of the Income Tax Act applies a flat 25% tax rate on all pension payments to non-residents. Non-resident payees do not file a Canadian tax return to pay this tax; it is withheld at source by the payer and remitted to the government of Canada. Part XIII tax may be reduced if Canada has a tax treaty with the pensioner's country, and there are almost 100 such agreements in place in 2019.[7]
Generally, treaties reduce withholding rates below 25% only on "periodic" pension payments. (The only remaining treaty that reduces withholding tax on a non-periodic payment is with Australia, where 15% withholding applies no matter what.) The term "periodic" clearly applies to public and employer pensions that are paid monthly. The definition is less obvious in the case of payments out of individual retirement savings plans, where the plan's beneficiary is in control of both the timing and size of withdrawals. A withdrawal from an RRSP is generally not considered periodic, even if it is one in a regular series. Only withdrawals from RRIFs, i.e. matured RRSPs that are distributing pension-like payments, at an annual rate no greater than the larger of 10% or twice the prescribed age-related RRIF withdrawal rate, are considered periodic payments.[8]
A summary of pension relevant provisions for each treaty country can be found in the table below. Information in the table was collected in November 2019, but new treaties can be agreed and old treaties amended at any time. Current treaties, as found on the Finance Department's website, should always be consulted to confirm exact language and application.
| Payee resident in | Treaty year | OAS | CPP | Pension | Exemption | OAS clawback? | Foreign tax on OAS/CPP? |
|---|---|---|---|---|---|---|---|
| Algeria | 1999 | 15% | 15% | 15% | $12,000 | ||
| Argentina | 1993 | 15% | 15% | 15% | NO | ||
| Armenia | 2004 | 15% | 15% | 15% | NO | ||
| Australia | 2002 | 15% | 15% | 15% | NO | ||
| Austria | 1999 | NO | |||||
| Azerbaijan | 2004 | 15% | 15% | 15% | $12,000 | NO | |
| Bangladesh | 1982 | 15% | 15% | 15% | NO | NO | |
| Barbados | 1980 | 15% | 15% | 15% | NO | ||
| Belgium | 2002 | NO | |||||
| Brazil | 1984 | NO | |||||
| Bulgaria | 1999 | 15% | 15% | 15% | NO | NO | |
| Cameroon | 1982 | ||||||
| Chile | 1998 | NO | |||||
| China | 1986 | ||||||
| Colombia | 2008 | 15% | 15% | 15% | NO | ||
| Croatia | 1997 | 15% | 15% | 15% | $12,000 | NO | |
| Cyprus | 1984 | 15% | 15% | 15% | $10,000 | NO | NO |
| Czech Republic | 2001 | 15% | NO | ||||
| Denmark | 1997 | NO | |||||
| Dominican Republic | 1976 | 18% | 18% | 18% | NO | NO | |
| Ecuador | 2001 | 15% | 15% | 15% | $12,000 | NO | |
| Egypt | 1983 | ||||||
| Estonia | 1995 | 15% | |||||
| Finland | 2006 | 20% | 20% | 20% | NO | ||
| France | 2010 | NO | |||||
| Gabon | 2002 | ||||||
| Germany | 2001 | 15% | 15% | NO | |||
| Greece | 2009 | 15% | 15% | 15% | $15,000 | NO | |
| Guyana | 1985 | ||||||
| Hong Kong | 2012 | ||||||
| Hungary | 1994 | 15% | 15% | 15% | NO | ||
| iceland | 1997 | 15% | 15% | 15% | NO | ||
| India | 1996 | NO | |||||
| Indonesia | 1998 | 15% | |||||
| Ireland | 2003 | 15% | 15% | 15% | $12,000 | NO | |
| Israel | 2016 | 15% | 15% | 15% | NO | ||
| Italy | 2002 | 15% | 15% | $12,000 | NO | ||
| Ivory Coast | 1983 | 15% | 15% | 15% | NO | ||
| Jamaica | 1978 | ||||||
| Japan | 2000 | ||||||
| Jordan | 1999 | NO | |||||
| Kazakhstan | 1996 | 15% | NO | ||||
| Kenya | 1983 | 15% | 15% | 15% | NO | ||
| Korea | 2006 | 15% | NO | ||||
| Kuwait | 2002 | 15% | 15% | 15% | |||
| Kyrgyzstan | 1998 | 15% | |||||
| Latvia | 1995 | 15% | |||||
| Lithuania | 1996 | 15% | |||||
| Luxembourg | 1999 | ||||||
| Malaysia | 1976 | 15% | 15% | 15% | NO | ||
| Malta | 1986 | 15% | 15% | 15% | NO | ||
| Mexico | 2006 | 15% | 15% | 15% | NO | ||
| Moldova | 2002 | 15% | 15% | 15% | NO | ||
| Mongolia | 2002 | 15% | 15% | 15% | NO | ||
| Morocco | 1975 | ||||||
| Netherlands | 1997 | 15% | 15% | ||||
| New Zealand | 2014 | 15% | 15% | 15% | NO | ||
| Nigeria | 1992 | ||||||
| Norway | 2002 | 15% | 15% | 15% | NO | ||
| Oman | 2004 | 15% | 15% | 15% | NO | ||
| Pakistan | 1976 | NO | |||||
| Papua New Guinea | 1987 | 15% | 15% | 15% | NO | ||
| Peru | 2001 | 15% | 15% | 15% | NO | ||
| Philippines | 1976 | $5,000 | NO | ||||
| Poland | 2012 | 15% | 15% | 15% | NO | ||
| Portugal | 1999 | 15% | 15% | 15% | $12,000 | NO | |
| Romania | 2004 | 15% | 15% | 15% | $12,000 | NO | |
| Russia | 1995 | NO | |||||
| Senegal | 2001 | 15% | 15% | 15% | $12,000 | NO | NO |
| Serbia | 2012 | 15% | 15% | 15% | |||
| Singapore | 2011 | NO | |||||
| Slovak Republic | 2001 | 15% | NO | ||||
| Slovenia | 2000 | 15% | |||||
| South Africa | 1995 | ||||||
| Spain | 2014 | 15% | 15% | 15% | NO | ||
| Sri Lanka | 1982 | 15% | 15% | 15% | NO | ||
| Sweden | 1996 | ||||||
| Switzerland | 2010 | 15% | 15% | 15% | NO | ||
| Taiwan | 2016 | 15% | 15% | 15% | NO | ||
| Tanzania | 1995 | 15% | 15% | 15% | NO | NO | |
| Thailand | 1984 | NO | |||||
| Trinidad and Tobago | 1995 | 15% | 15% | 15% | NO | NO | |
| Tunisia | 1982 | ||||||
| Turkey | 2009 | 15% | 15% | 15% | $12,000 | NO | |
| Ukraine | 1996 | NO | |||||
| United Arab Emirates | 2002 | ||||||
| United Kingdom | 2003 | 0% | 0% | 0% | NO | ||
| United States | 2007 | 0% | 0% | 15% | NO | ||
| Uzbekistan | 1999 | NO | |||||
| Venezuela | 2001 | ||||||
| Vietnam | 1997 | 15% | |||||
| Zambia | 1984 | 15% | 15% | 15% | NO | ||
| Zimbabwe | 1992 | 15% | 15% | 15% | NO | NO |
The first two columns are the country of residence and the year in which the current version of the treaty was signed. The next three columns show Canada's reduced withholding rate on a variety of periodic pension payments, with "Pension" signifying both employer pensions and RRIF withdrawals. Some treaties exempt some of the periodic pension payments from Canadian withholding taxes and apply the reduced rate only above the exemption (in Canadian dollars) shown in column 6. Claiming a dollar exemption requires applying for and receiving approval from CRA of a Form NR5 application.[9] Column 7 marks the countries where the treaty prevents collection of what is colloquially called "OAS clawback" from non-residents with high incomes.[10] The final column marks the countries that are forbidden by the treaty from levying taxes on CPP and OAS payments to their residents.
Foreign source pensions paid to non-residents
Such pensions are not subject to Canadian tax, even if the recipient is a Canadian citizen. Consult local laws and, if necessary, tax treaties between the country that pays the pension and the country where it's received.
See also
References
- ^ "Line 314 - Pension income amount". Canada.ca. Retrieved November 28, 2019.
- ^ "Line 115 - Pensions from a foreign country". Canada.ca. Retrieved November 28, 2019.
- ^ "US-Canada tax treaty". fin.gc.ca. Retrieved December 7, 2023.
- ^ "W8-BEN" (PDF). irs.gov. Retrieved November 28, 2019.
- ^ "Federal foreign tax credit". canada.ca. Retrieved November 28, 2019.
- ^ "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs". irs.gov. Retrieved November 28, 2019.
- ^ "Tax Treaties: In Force". fin.gc.ca. Retrieved December 7, 2023.
- ^ "Income Tax Conventions Interpretation Act". justice.gov.ca. Retrieved November 29, 2019.
- ^ "NR5 - Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld" (PDF). canada.ca. Retrieved November 29, 2019.
- ^ "OAS Recovery Tax". canada.ca. Retrieved November 29, 2019.
